Democrats Line Up Behind Retirement Benefits Match Plans

January 14, 2008

While scrapping for the Democratic nomination for president, Hillary Rodham Clinton and Barack Obama are pushing similar proposals to create federal matches for lower-income workers’ contributions to their 401(k) and other types of retirement accounts.

In addition, John Edwards is backing a similar proposal, but one that would not necessarily earmark the matches exclusively for retirement.

If any of the leading Democratic contenders wins the presidential election this November, some sort of a federal match proposal stands a strong chance of getting passed into law. Meanwhile, other leading Democratic legislators are jumping on the bandwagon.

Clinton and Obama’s proposals could generate new retirement account contributions of up to $20 billion a year, according to J. Mark Iwry, non-resident senior fellow for the Brookings Institution, a Washington think tank, and the Treasury Department’s tax benefits counsel during President Bill Clinton’s administration.

Similar proposals to spur private retirement savings could not be seen on the Web sites of the leading Republican candidates.

The three leading Democratic presidential contenders say that a federal matching program will encourage lower-income Americans to save for their retirement. But the Democratic front-runners would provide federal largesse in slightly different ways.

Clinton’s proposal

Clinton’s proposal would provide a matching refundable tax credit for the first $1,000 of saving by every married couple making up to $60,000 a year, and a 50 percent refundable credit on the first $1,000 of savings by couples making between $60,000 and $100,000 a year, according to an explanation on her campaign Web site. Under her proposal, a tax refund would be deposited as a match into the saver’s retirement account.

Obama’s proposal, published on his campaign Web site, would provide a 50 percent federal match for the first $1,000 that families with annual income of less than $75,000 save, with the matched amount automatically deposited into the saver’s retirement account.

Edwards’ proposal would create a new "Get Ahead" tax credit that would match up to $500 a year for families earning up to $75,000 annually, and the credits could be used for retirement, college education, buying a home, investing in a small business or for medical and financial emergencies, according to his campaign’s Web site.

Reps. George Miller, D-California, and Robert Andrews, D-New Jersey, also endorsed a federal matching program in concept during a December 11 teleconference with reporters. However, they did not release any details.

In addition, Reps. Rahm Emanuel, D-Illinois, and Jim Ramstad, R-Minnesota, introduced legislation last June that would enhance a saver’s credit that already exists under the law. Emanuel served as a senior advisor to Clinton.

The existing saver’s credit matches 401(k) or IRA savings by families earning up to $53,000 at a rate ranging from 10 percent to 50 percent, depending on the level of family income. Unlike the proposals of the leading Democratic candidates, the existing program simply reduces the tax liability of the saver and does not provide a refund.

Emanuel and Ramstad’s bill would expand the existing program, making the credits refundable and depositing the refunds in the saver’s retirement account.

"Many of these [lower-income] workers are going to need assistance" to supplement their retirement savings, Miller, chairman of the House Education and Labor Committee, said during the teleconference last month.

Hard to stop

Despite the fact that proposals to provide a refundable federal credit have been drawing much of their initial support from Democrats, some legislative insiders believe they will be hard to stop—even by Republicans who often perceive tax refunds as unwelcome forms of welfare.

"Republicans generally don’t like refundable credits, but I don’t think anybody dislikes them enough to try to kill a popular bill [that includes refundable credits]," said Bill Sweetnam, a partner at Groom Law Group and former tax benefits counsel for the George W. Bush administration.

"The biggest problem is that low-income people don’t save enough, and traditional tax incentives aren’t working. If you don’t pay taxes, a tax incentive doesn’t help you save."

Added Iwry: "It is time to enact a major progressive matching credit or deposit that will help the majority of Americans to save and raise our national savings rate."

According to Iwry, who has been serving as a retirement policy advisor to both Clinton and Obama, the new Democratic proposals are similar to a "universal savings account" plan proposed during President Clinton’s administration.

Like the new plans, the so-called "USA" proposal would have provided matching deposits similar to refundable tax credits to low- and moderate-income workers, Iwry says.

In addition, the USA proposal would have set up new retirement accounts that could be used by all Americans. Unlike the new proposals, the USA proposal would have provided lower-income workers with "seed money" of several hundred dollars from the federal government to get the plans rolling, Iwry says.

The USA legislative proposal never was enacted, according to Iwry. But the Bush administration adopted the current saver’s credit program in 2001. That program has been used by about 5 million people a year, Iwry says.

Along with promoting the concept of a refundable credit for workers, both Obama and Clinton also propose creating new retirement plans for workers. Obama’s proposal would require employers who don’t currently offer retirement plans to provide automatic enrollment in a direct-deposit IRA. His proposal is similar to one that Iwry has been advocating alongside David John, a senior research fellow with the Heritage Foundation in Washington.

"Momentum is gathering for automatic workplace savings and—if Congress can agree on how to pay for it—a major expansion of the matching tax credit for savers," Iwry says.